Real estate in a FIRE plan (your home, and rentals)

You cannot write a book about decumulation without a chapter on real estate. For most households it is the largest thing they own, and often the only asset that ever felt solid. But the word covers two objects with almost nothing in common inside a withdrawal plan. The first is the home you live in. It is not an asset of the plan. It is a cost reducer, and the source of the most common double-counting error in the field. The second is rental property, a stream of supplementary income. It has qualities nothing else offers at that price, starting with rents that follow prices, a rare and valuable thing (Inflation and the withdrawal rate: the exact link). Its drawbacks are just as distinctive: concentration, illiquidity, management, and a tax treatment with a sting in the tail.

This article takes both, plus the forms in between. It shows how to count each one without lying to yourself. It sets up the sell-or-keep call at the switch, then the question of carrying a mortgage into retirement. It ends with the modeling: a plan that holds real estate simulates perfectly well, as long as you translate it properly.

Your home: a service, a reserve, and a mortgage decision§

The service: phantom rent. Owning your roof means collecting an implicit rent, untaxed: the rent you never pay. On a $400k home, that is something like $12k to $16k a year of spending you do not have to fund. At a 3.5% withdrawal rate, that is the equivalent of $350k to $450k of capital you never have to accumulate. That is the whole case for reaching retirement with the mortgage gone: the spending floor drops, and the target drops with it (How much you need). The offsets deserve an honest budget line. Long-run upkeep first, 1 to 2% of the value a year, the item every budget forgets. Property tax next, which only goes one way over a retirement, and which lowers your tax bill only if you itemize and have not already used up the cap on state and local taxes (USD 40,400 for 2026, phased down at high incomes and scheduled to fall back to USD 10,000 after 2029). And last, capital tied up in something that pays no withdrawal.

The reserve: three taps of last resort. The house can still be turned into money if life demands it. The first tap is downsizing: sell at 400 and buy back at 250 and you free $150k on paper, more like $115k to $130k once both transactions are paid for. The chance usually comes along right when the family house has become too big. The tax side is unusually kind here: up to USD 250,000 of gain on the home you sell escapes tax, USD 500,000 on a joint return, as long as you owned it and lived in it for two of the five years before the sale (IRS Topic 701). The second tap is the reverse mortgage, and in practice that means the HECM, the FHA-insured version: 62 or older, the house as your principal residence, counseling with a HUD-approved agency before you sign, and the proceeds taken as a lump sum, a line of credit or a monthly check. You keep paying the property tax, the insurance and the upkeep, or the loan comes due. It is expensive (insurance premium up front, origination, ongoing insurance, and a balance that compounds against you), which is exactly why it belongs at the end of the list. The third tap is a home equity line of credit, cheaper and faster while you still have the income to qualify, with one catch worth remembering from 2008: the lender can cut the line at the moment you want to draw on it. None of these taps get counted in the plan, because none of them size it. They get listed, as named margins behind the failure probability (Failure probability: reading it, choosing it, and not letting it run you). They are the nets that keep a simulated ruin from being a lived one.

Carrying the mortgage: the argument, and what softens it. ERN (Part 21) advises against retiring with a mortgage still running. It is leverage: you are borrowing in order to stay invested in stocks, and it amplifies sequence risk. The payment becomes one more fixed withdrawal during a crash (Leverage, margin and borrowing against your portfolio (advanced)). The argument is right. The standard American loan softens it twice. It is fixed for thirty years, so nothing reprices and inflation quietly eats the balance: a 3% fixed loan through a stretch of 5% inflation is an asset, not a liability. And the option runs one way, since you can refinance down if rates fall and keep your rate if they rise. What you cannot refinance is the sequence. The workable rule fits in one sentence. A low fixed-rate mortgage is defensible if, and only if, the payment fits inside your floor without straining it and the portfolio covers the remaining balance several times over. Otherwise the peace of a paid-off house beats the theoretical arbitrage (The psychology of spending: why spending it is the hard part).

Rentals: a valuable flow, marked down without mercy§

What a rental gives you. Rents that follow prices, first of all. No legal index sits behind them: the lease resets at market when it renews, with a lag, and rent-stabilized cities cap the reset. Over a decade, though, rent tracks the cost of living better than almost any other private income. The flow behaves like a living linker, an inflation-linked bond, imperfect but precious in the regime that kills retirees (Market regimes (growth × inflation, sticky bears) and why they matter). Then partial decorrelation from the financial markets. Then, during accumulation only, access to cheap bank leverage. For the share of the floor it covers, a net rent is first-quality income. That does not make it a defensive asset in the portfolio.

What it costs, which the brochures skip. Concentration comes first: one property is one tenant, one city, one building, the idiosyncratic risk the portfolio chapters spend their time removing on the equity side (International diversification (and home bias)). Then illiquidity: months to sell, and 6 to 9% of the price gone in commission, closing costs and concessions. Then management, a job rather than an investment, with vacancy, tenants who stop paying, repairs and the phone ringing at 11 pm, at 70 as much as at 40. And then tax. Rent is ordinary income, taxed at your marginal rate after expenses, with state income tax on top where you live or where the building sits. The shelter is depreciation: the building, never the land, is written off over 27.5 years straight line, which often erases the taxable income for as long as the schedule runs. It is a deferral, not a gift. When you sell, the depreciation you took (or could have taken) comes back as unrecaptured section 1250 gain, taxed at up to 25% (IRS Topic 409), the rest of the gain at long-term rates, and the 3.8% net investment income tax rides on top above the usual thresholds. So a rental has two lives: sheltered while the schedule runs, fully taxed afterwards (US taxes in the withdrawal phase). The tax figures in this article were checked against irs.gov and hud.gov at the time of writing; caps, rates and thresholds move, so read the current ones before you compute anything.

The honest number. Between the listed gross yield (5 to 7%) and the net-net you actually live on, a cascade removes the owner's costs, the property tax, upkeep, vacancy, management and tax. Run it on a $200,000 unit renting at $1,000 a month, bought with cash. Annual rent is $12,000, a 6.0% gross. The owner's share of the association dues and the insurance takes $1,150, property tax $900, routine upkeep $600, 5% vacancy another $600, management plus a rent guarantee $1,490. That leaves $7,260, or 3.6% before tax. Now call the friction on the flow 45%, roughly what a middle-bracket owner hands over once federal and state are counted: tax takes $3,279 and the net-net falls to 2.0%. While depreciation still shelters the income, the same property yields 3.6%, and it goes on doing so until the schedule runs out.

RENTAL PROPERTYFrom the listed gross yield to the net-net: the cascadea $200,000 unit renting at $1,000 a month, bought with cash, 45% friction on the flow: swap each step for your own0%2%4%6%6.0%grossyield$12,000−$1,150owner'scharges−$900propertytax−$600routineupkeep−$600vacancy(5%)−$1,490managementand arrearsnet rent before tax3.6% = $7,260−$3,2792.0%net-netfully taxed$3,981no tax3.6%net-netdepreciated$7,260Tax on the flow: 45.2% of the taxable net in this example, what a middle-bracket owner hands over once federal and state are counted.Where depreciation still runs, it erases the taxable base for as long as the schedule lasts, whatever the rate.
The cascade above, step by step, from the listed gross yield down to the net-net: taxed on the flow on one side, sheltered by depreciation on the other. Every step is an assumption, the tax rate first among them. Replace them with yours and read your own net-net.

The honest net-net on a rental therefore lands around 2 to 4% of the property's value, a range the tax treatment alone is enough to sweep. That is comparable to a portfolio's withdrawal rate, without the liquidity and without the diversification, with indexation and leverage as the offsets. Rental property is neither the goldmine the course sellers describe nor the blunder the index crowd mocks. It is a decent income asset, expensive in work and in tax, whose place in a plan gets calculated.

How to count it in the plan. Three steps.

  1. The flow: a realistic net-net rent (your last three years, not the spreadsheet you bought on), marked down 15 to 25% for a long vacancy, a big repair and a change in the tax rules.
  2. The entry into the simulator: indexed supplementary income (Pensions and other income in the plan). The side income control is for a flow that will stop (a planned sale), the pension control for a flow that runs for life. The simulated capital does not include the property's value.
  3. The reserve: the market value net of tax, listed as a margin and reachable by selling.

That translation turns the keep-or-sell A/B into a ten-minute job. Which is the next call.

The forms in between: property funds, listed and not§

Non-traded property funds, the non-traded REITs and the real estate interval funds, are securitized real estate sold with the manners of the private version. The qualities are real: genuine diversification across dozens of buildings, no management, a steady distribution of 4 to 5%. So are the flaws. Sales loads and layered fees can add up to several years of income. Liquidity is contractual rather than traded: redemptions are capped quarter by quarter, and the queues of 2022 and 2023, when the largest non-traded REIT hit its limit and made its investors wait months, showed what that cap is worth in bad weather. Rate sensitivity is no longer a theory either, with NAV markdowns of 10 to 20% over the same stretch, published on a lag that flatters the volatility. The verdict is simple. It is an acceptable income asset in a moderate dose (5 to 15% of wealth) for someone who wants real estate without the work. Never a bond substitute, as 2022 proved. And never bought without a planned holding period of 8 to 10 years, the time it takes to amortize the cost of getting in.

Listed REITs are the same buildings priced every second, and they belong in the gallery of false defensives (False defensives: what looks defensive and is not): a fine slice of the equity sleeve, useless as a shock absorber. Buying a life estate or a remainder interest answers a different question again. These are patient investors' tools, not a retiree's: total illiquidity for the length of the arrangement disqualifies them as a source of withdrawals.

The essentials§

Going further§